Rolling Ahead Michelin Shows its Durability

In recent years, the share price of Europe's largest tiremaker has risen by more than 90 percent – and it still has upward potential.
The Michelin Man, also known as Bibendum, has been keeping investors happy with steady growth.

In the central French city of Clermont-Ferrand, the future looks bright. Or at least it does for employees of Michelin, the world’s second-biggest tire manufacturer behind Bridgestone. Hopes here are just as high as the picturesque mountains that surround the company’s headquarters.

Michelin expects to grow in line with the market in 2017 and is forecasting a further rise in its operating results. The venerable French firm, which was founded in 1889 and is now represented in 170 countries, has just posted better than expected figures for 2016, outperforming rivals such as Germany’s Continental and Goodyear in the United States.

Profits rose by more than 43 percent to €1.66 billion, versus forecasts of €1.52 billion. Michelin shares then climbed 2.6 percent. The profit increase was driven in part by the falling costs of raw materials, as well as by austerity measures implemented to keep up with cheap competition from Asia.

Most experts see further potential in the share price of the company, which also sells maps and is perhaps best known for producing its prestigious restaurant guide. Analysts at the financial service provider Boursorama predict that Michelin’s share price could reach €110 within three months, representing growth of more than 3 percent.

This year, Michelin expects similar market conditions to 2016, though the company says that the possibility of rising raw material costs could add €900 million to its expenditure.

Two things going in Michelin’s favor are that it is better positioned than its rivals in Germany and the United States and that it enjoys strong liquidity. Continental, for example, was burdened by callback costs, antitrust penalties and higher outlays for development in 2016. Its margin of 10.7 percent was lower than Michelin’s 12.9 percent. Goodyear suffered from weak sales in its domestic market and saw its revenues decline significantly.

The prevailing view seems to be that investors should hold onto Michelin's stock but hold off from buying it. That is because Michelin’s share price has steadily increased by more than 90 percent in the last five years, with a rise of almost 25 percent in the last year and a 7-percent jump in the past 3 months alone. Dividends also performed well and were raised by 14 percent to €3.25 for last year, in a move that surprised analysts. Yet evaluations of the stock vary widely.

Jose Asumendi from JP Morgan described the outlook for 2017 as “highly promising” and, with a target price of €120 a share, continued to classify the stock as “overweight.” Barclays, on the other hand, considers it to be “underweight.” Another analyst, Alexis Albert, called Michelin’s 2016 results “solid” but was cautious about the company’s prospects this year.

Others are anticipating stronger growth. Goldman Sachs has raised the target price from €113 to €116. Citigroup also has a positive view of Michelin – with a target price of €117. “The sales volumes targeted by the management for 2017 seem cautious,” said analyst Raghav Gupta-Chaudhary, who expects the tire manufacturer to beat the market. CM-CIC Market Solutions noted that the outlook for 2017 was “solid and encouraging.” It sees upsides in the car and truck tire business, as well as in mining.

This year, Michelin expects similar market conditions to 2016, though the company says that the possibility of rising raw material costs could add €900 million to its expenditure. A further opportunity for growth may be found in the recovery of the mining industry, which could increase demand for tires for wheel loaders, where returns are high.

2017 should be another year of growth, conforming to the goals set by the group for 2020. Jean-Dominique Senard, Michelin CEO

In 2016, Michelin encountered problems from tough competition, currency effects and price reductions, which caused sales to decline by 1.4 percent to €20.9 billion. At the very least this year, the tough competition will stay. In a bid to stabilize margins in 2017, the company intends to raise tire prices in its most important markets by up to 8 percent.

Michelin also has ambitious long-term goals to match the projected 20-percent sales growth in the tire sector by 2020. As Chief Executive Jean-Dominique Senard emphasized, “2017 should be another year of growth, conforming to the goals set by the group for 2020.” The company is seeking to expand its presence in several regions where it is currently underrepresented.

Mr. Senard, who in 2012 became the first person from outside the founding family to head the firm, is focusing on countries like Mexico, where he sees great potential. Michelin has already got its expansion strategy under way, having acquired the Brazilian bicycle tire manufacturer Levorin for €135 million in 2016.

The company is also counting on some growth to come from its service sector, even though this is small in comparison to the tire division. Savings of more than €1.2 billion are also expected to be made by 2020. If everything goes to plan, the Michelin Man – that famous symbol of the company – should continue to be well-positioned.

But the competition isn’t asleep at the wheel either. At the Tire Technology Expo in Hanover, an international jury awarded Continental the title of “Tire Manufacturer of the Year 2017.” It seems the battle for supremacy in the tire industry is set to roll on.


Tanja Kuchenbecker is a correspondent for Handelsblatt in Paris. To contact the author: [email protected]